Sprint profit falls on merger costs

Stock sinks after sales, subscriber shortfall

WASHINGTON (MarketWatch) -- Sprint Nextel Corp. on Thursday said second-quarter profit fell sharply owing to merger-related costs, while revenue growth fell short of Wall Street's forecast as the phone company signed up fewer wireless customers than expected.

The news sent shares of Reston, Va.-based Sprint
S, +1.55%
nearly 12% lower, offsetting the company's announcement that it plans to buy back up to 10% of its common shares. The stock, which closed Wednesday at $20.13, fell to as low as $17.10 before finishing Thursday's session at $17.75.

In the past year, Sprint has transformed itself mostly into a wireless phone company. The No. 3 U.S. mobile operator bought Nextel Communications and a handful of smaller partners and spun off its local-phone business into a separate company called Embarq Corp.
EQ, +2.70%

Yet Sprint executives said the distraction of all their moves undercut efforts to sign up -- and retain -- more high-paying customers compared to its rivals. Many new subscribers have chosen cheaper monthly plans or prepaid plans that are less profitable for Sprint.

The increase, however, was below market forecasts ranging from 725,000 to 800,000. Nearly 500,000 of Sprint's new customers also chose the cheaper Boost Mobile prepaid plan, whose customers paid an average of $34 a month, down from $38 a year ago.

What's worse, churn, or the percentage of Boost customers who quit the service, rose to 6% from 5.4% in the prior quarter.

Among postpaid customers, who pay their bills at the end of each month, average monthly revenue per subscriber fell 6% to $62 from a year ago, though it was still higher than Cingular and Verizon.

Churn remained stubbornly high, at 2.1%, among those customers. By contrast, Verizon reported industry-low churn of 1.13% in the second quarter, while Cingular cut its churn to a company low 1.7% from 2.2% a year earlier.

Sprint said it's taking actions to "improve our competitiveness." Steps include further restructuring, new credit and marketing strategies as well as the introduction of innovative new services.

"Our goal is to get the highest quality customer,' Chief Executive Gary Forsee said in an interview.

He dismissed the notion that the company suffered from the absence of Motorola Inc's popular Razr lines phones. "That hasn't been an issue."

Despite a disappointing quarter, Sprint has been one of the industry's fastest growing companies over the past few years, and it continues to generate plenty of cash. As a result, Sprint said Thursday it would return value to investors in the form of a $6 billion stock buyback over the next 18 months.

Net profit falls

In the second quarter, Sprint reported net income of $370 million, or 12 cents a share, down from $600 million, or 40 cents, earned a year earlier.

Revenue jumped 76% to $10.01 billion from $5.68 billion, reflecting the acquisition last year of Nextel. Revenue rose a lesser 5% on a pro-forma basis, which adjusts for the Nextel and other acquisitions.

Excluding one-time items such as merger costs, Sprint said adjusted earnings rose 7% to 32 cents a share, up from 30 cents on a comparable basis in the year-earlier second quarter.

On that basis, Sprint was expected to earn 33 cents a share on revenue of $10.39 billion, according to the consensus of analysts surveyed by Thomson First Call.

Looking ahead, Sprint said it expects annual revenue in 2006 to range from $41 billion to $41.5 billion, compared with its prior forecast of "$41 billion or more."

In the near term, Forsee said wireless would contribute slightly less to growth than expected, as the company implements additional measures to sign up more high-quality customers and reduce its reliance on less credit-worthy subscribers.

Still, wireless revenue expanded by 8%, adjusted for acquisitions, to $8.52 billion from $7.9 billion a year earlier.

The company's long-distance business, meanwhile, experienced a 5% decline in adjusted revenue to $1.64 billion as more phone consumers switch to rival services or alternative technologies.

Adjusted operating income for the long-distance business rose 12% to $162 million, though, as the company signed up more corporate customers for its Internet-based services.

Sprint helped cable companies to deliver phone service to 1.2 million subscribers in the second quarter and the carrier announced Thursday that it would expand its relationship with cable giant Time Warner.

Sprint also uses its long-distance network to carry its wireless-phone traffic, avoiding the higher costs of buying capacity from other providers.

"The long-distance network is a very important asset in our portfolio," Forsee said.

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